8 Flashcards
What effect does FIFO have on financial statements during rising costs?
FIFO reports the lowest cost of goods sold, yielding the highest gross profit.
What effect does LIFO have on financial statements during rising costs?
LIFO reports the highest cost of goods sold, yielding the lowest gross profit.
What does the weighted average method yield?
Weighted averages yield results between FIFO and LIFO.
What is an advantage of FIFO?
FIFO inventory on the balance sheet approximates its current costs.
What is an advantage of LIFO?
LIFO COGS on the income statement approximates its current costs.
What is an advantage of the weighted average method?
Weighted average smooths out erratic changes in costs.
What is the advantage of specific identification?
Specific identification matches the costs of the items with the revenues they generate.
What does the IRS require regarding costing methods?
The IRS requires that when a costing method is used for tax reporting, it also must be used for financial reporting.
What is the lower of cost or market (LCM) rule?
After applying one of the four costing methods, inventory is reviewed to ensure it is reported at the lower of cost or market (LCM).
What happens to inventory value when prices fall?
When prices fall, the value of inventory falls.
What is recorded when market value is less than the cost of inventory?
A loss is recorded.
Is an adjustment necessary when market value is greater than cost?
No adjustment is necessary when market value is greater than cost.
How is LCM applied?
LCM is applied in one of 3 ways:
1. To each individual item separately
2. To major categories of items
3. To inventory as a whole
What is the journal entry to record the loss?
Cost of Goods Sold
Inventory
